Strengthening confidence and communication through audit committee reporting

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By Tomas Muller – Tomas.Muller@EthicalBoardroom.com

Across the globe, the function of the audit committee is to provide recommendations, guidance and advice to the board of companies and organisations. Specific responsibilities and requirements for an audit committee can vary by country, however, the framework of the audit committee role is often influenced by economic and political factors and unionised groups who are capable of campaigning for and passing through evolved legislation. Increasingly there is a consensus of sentiment building from these groups to make changes to improve the transparency of the audit committee role so as to increase investor and stakeholder confidence. In particular corporate governance specialists and leaders are suggesting that the audit committee report should be enhanced such that disclosure is increased substantially and the relevant information is provided in a clear and straightforward manner. Corporate governance and policy organisations are calling for audit committees of public companies across all industries and sizes to take steps in this direction.  

They suggest that by enterprises strengthening their public disclosures efforts investors will be increasingly confident in industry worldwide. These experts want audit committees to convey key elements of critical work to involved parties in an effective and direct manner. These demands are centred on the idea that stakeholders in the financial markets should understand and have a comprehension of the audit committee role so that members of the financial community may operate at a more efficient level of understanding and performance. 

If this philosophy is adopted audit committees will have the opportunity to educate others about the details of their crucial function. Audit committees are vital in their role of governance of public companies and play a fundamental role in upholding the integrity of the broader external financial reporting framework. The audit committee helps the board of directors in the corporate governance role and oversees the responsibility of financial reporting as well as that of an internal control system, risk management and internal and external audit functions. The corporate governance groups and specialists have put forward a number of suggestions towards improving audit committee transparency.  They have suggested that a specific and full clarification of the scope of the audit committee responsibilities within the audit committee report will build investor confidence. In addition, clearly defining the composition of the audit committee will foster an attitude of accountability and contribute to confidence in the enterprise.  

Other suggestions to improve audit committee transparency and consequently investor confidence include:

  • Disclosing the relevant factors the audit committee have considered when selecting an audit firm.
  • Explaining how the audit committee carries out oversight of the external auditor.
  • Providing information about the audit committee’s involvement in the selection of the lead audit    engagement partner.
  • Disclosing the key factors under consideration for setting external auditor compensation.
  • Providing information about how the external auditor will be evaluated in their role.

The specialists and organisations behind these suggestions of increasing audit committee transparency have purported that clear communication and the sharing of important information between interested parties in the financial markets improves investor confidence. It is the improvement in investor confidence that drives the market on a larger scale and will provide vital boosts to capital allocation and market efficiency. 

In this regard, it is of crucial importance that audit committees explore methods, such as those mentioned above, towards improving the provision of meaningful information in the financial marketplace. Over the last five years, following the financial crisis, a number of organisations worldwide have successfully adopted many of these suggestions and acted to enhance audit committee disclosures.   

A number of new voluntary disclosure practices of the audit committee have been implemented by enterprises globally, with particular success to date in the US. Going forward, it is important to focus efforts in a direction that focusses on encouraging audit committee members to offer a higher level of transparency to investors specifically about the work they are doing. This has notably been achieved to date without the imposition of new regulation or an expansion of the committee’s scope of work.  The key to these changes will be about effective disclosure rather than merely an increased amount of disclosure that may not be useful to stakeholders and interested parties. 

 

Attribution – Photo by Juhan Sonin